Preparing Employees for Retirement, a Global Comparison
In the United States, the average deferral rate is 8.6%. American workers are saving for retirement, and they’re saving well, as reports show the mean 401(k) account balance has soared 466% in the last 10 years.
But how do these figures compare to other nations? Even as U.S. employees accumulate their savings mass, what takeaways can plan sponsors learn from studying savings politics in different parts of the world?
The 2019 Aegon Retirement Readiness Survey, conducted with the Transamerica Center for Retirement Studies and Longevidade Mongeral Aegon, seeks to answer these questions. In the survey report, Aegon analysts rank employees’ reported levels of retirement readiness in markets around the world. Those who feel best prepared for retirement achieve higher numbers on a scale of 1 to 10.
While the United States ranked a medium index rate of 6.6, India earned the highest score out of the 15 countries studied, at 7.8. Brazil came in at 6.5, and China and the United Kingdom performed well at 6.2 each.
This type of confidence and savings approach in these countries isn’t solely caused by enhanced employer communications strategies or government impositions—it largely falls on each worker’s proactive approach towards their long-term savings.
“Our research has shown that countries in which defined contribution [DC] plans are better established, for example India, the United States and the United Kingdom, tend to have a higher percentage of individuals who say that they always make sure they are saving for retirement,” says Dick Schiethart, external communications manager for Aegon.
Sixty-one percent of respondents in India are habitual savers, identified as those who have crafted a written retirement plan, are adding to their retirement savings, and are on track to meet their financial goals. Forty-six percent of respondents are habitual savers in the United Kingdom, 53% in the United States and 34% in Brazil.
“Habitual savers are better prepared for retirement across a range of measures compared to other groups of savers including: their awareness of the need to plan financially for retirement, having a written plan and feeling confident that they will have a comfortable retirement,” Schiethart adds.
Pensions and government savings
Aside from consistently adding to long-term financial savings, investors in these countries are generally required to participate in workplace savings plans by their respective governments, adding even more to their savings objectives.
While the United Kingdom obliges all employers to automatically enroll their workers into a retirement plan at a minimum contribution of 3%, India mandates pension plans for the country’s private sector of workers, separated into three channels: a life insurance plan, a defined benefit (DB) plan with employer and government contributions, and a DC plan with contributions from workers and plan sponsors, according to Aegon. Brazil, however, requires private-sector and self-funded employees to accrue savings via its social security system.
For India, the multifaceted retirement system results in an average income replacement ratio of 99%, according to a 2017 report by the Organization for Economic Co-operation and Development (OECD). Other countries with the highest income replacement ratios include Italy at 93% and Portugal at 95% of working wages, though it should be noted that these countries are experiencing far lower economic growth rates compared with India.
Key takeaways for employers
While Indian investors are greatly optimistic over their retirement savings and their relationship to advisers, Catherine Collinson, CEO and president of nonprofit Transamerica Institute and Transamerica Center for Retirement Studies, notes there are economic factors fueling this enthusiasm. In the Aegon report, she explains, most Indian workers are employed in urban areas of the country, where a booming economy currently exists.
“They are among the most optimistic when it comes to future generations, because they are enjoying so much economic growth,” she says. “That drives a lot of optimism, which is coupled with retirement savings habits.”
Even in already-developed nations, governments can learn and apply certain strategies implemented globally. Collinson previously told PLANADVISER, PLANSPONSOR’s sister publication, that the U.S. government can require employers to offer auto-enrollment in retirement plans, a move already established in the United Kingdom, and can continue efforts to implement retirement plan auto-portability.
Anne Lester, portfolio manager and head of retirement solutions at J.P. Morgan Asset Management, says countries can view how other nations provide help for retirement and emulate flavors from that. “Because the thing a plan sponsor cannot do is make an employee save, but they can provide a structure that encourages it,” she adds.
But even in developed, developing, and underdeveloped nations, all these countries face separate economic factors and hurdles. Collinson emphasizes the continuous growing need for retirement savings assistance around the world, especially for older workers as longevity rises and birth rates decline, which is turn adds a strain on social security systems.
“In each country we surveyed 100 retirees, and many are retiring sooner than planned either for health reasons or employment-related reasons,” she says. “It’s very concerning because around the world, countries are at a point where individuals are expected to self-fund a greater portion of their retirement income.”
Countries are seeing a rise in defined contribution (DC) plans, but plan sponsors throughout the globe must ask themselves if their workers can save enough over the course of their career with just one savings method, or if there is another tactic waiting to be applied.
“Employers play such an important role through the offering of benefits that make it easy to save,” adds Collinson. “This is a global challenge, and the extent that we can offer best practices across countries and find new ideas and innovation can really only help the situation.”